ARBOR WEALTH: Four years of tough economic sledding

By Margaret McDowell

Published: Sunday, October 28, 2012 at 03:32 PM.

Like most South Walton professionals, I read industry journals, domestic and international academic papers as well as newspapers of the U.S. and abroad in order to establish a base of information through which I synthesize data.

This global macro information helps me determine where markets might be headed and how our clients might benefit. Some sources are daily, like the Athens News from Greece, which recently reported growing food lines amid widespread rejection of ECB imposed austerity as well as the disturbing rise in popularity of two extremist political parties.

Some data sources are weekly. And some, like the Hoisington Report, are quarterly, and well worth the wait.

Firm founder Van Hoisington and renowned economist Lacy Hunt, Ph.D., provide their economic outlook, released this past Monday. Their conclusions are disturbing. Consider the report’s first paragraph, under a subheading of “Growth Recession.”

The Hoisington Report relates, “Entering the final quarter of the year, domestic and global economic conditions are extremely fragile. Across the globe, countries are in outright recession, and in some instances where aggregate growth is holding above the zero line, manufacturing sectors are contracting.”

The report offers the following conclusions in layman’s terms. One, the Federal Reserve’s QE1 (Quantitative Easing) and QE2, and now QE3, were necessary governmental interventions, but made very little substantial long-term impact on the economy.

And further governmental stimulation, designed to ignite spending and to a certain degree increase inflation, will suffer similar fates. What these cash injections did, essentially, was increase the price of commodities, like food and gas.

Like most South Walton professionals, I read industry journals, domestic and international academic papers as well as newspapers of the U.S. and abroad in order to establish a base of information through which I synthesize data.

This global macro information helps me determine where markets might be headed and how our clients might benefit. Some sources are daily, like the Athens News from Greece, which recently reported growing food lines amid widespread rejection of ECB imposed austerity as well as the disturbing rise in popularity of two extremist political parties.

Some data sources are weekly. And some, like the Hoisington Report, are quarterly, and well worth the wait.

Firm founder Van Hoisington and renowned economist Lacy Hunt, Ph.D., provide their economic outlook, released this past Monday. Their conclusions are disturbing. Consider the report’s first paragraph, under a subheading of “Growth Recession.”

The Hoisington Report relates, “Entering the final quarter of the year, domestic and global economic conditions are extremely fragile. Across the globe, countries are in outright recession, and in some instances where aggregate growth is holding above the zero line, manufacturing sectors are contracting.”

The report offers the following conclusions in layman’s terms. One, the Federal Reserve’s QE1 (Quantitative Easing) and QE2, and now QE3, were necessary governmental interventions, but made very little substantial long-term impact on the economy.

And further governmental stimulation, designed to ignite spending and to a certain degree increase inflation, will suffer similar fates. What these cash injections did, essentially, was increase the price of commodities, like food and gas.

And, since those whose incomes are considered middle class spend a greater percentage of their income on basic items like fuel and food, their spending power has actually decreased. So Hoisington is essentially saying that the governmental stimuli raised prices on those who could least afford it, and who have seen their real (inflation adjusted) income and savings rate decline.

International trade is experiencing a downturn. And as we all know, the U.S. is linked with the exporting activities of the emerging market countries. Economic isolationism is no longer a practical ethos in the modern global world.

Our markets have been faring pretty well, though, right? Here, we are required to distinguish between the economy and the stock market, which are two separate considerations, though certainly interrelated and which influence each other significantly.

Those with discretionary income, who have invested in what we call a cyclical bull market within a longer-running bear market, have seen their investments bear fruit. Naturally, this is good news for investors and good news for our clients.

The problem is, the long-term investing environment is impacted greatly by the winds of global economic challenges, and the coming four years looks like tough sledding, regardless of which presidential candidate claims victory.

European leaders vacation in late summer, and simply shelve their economic issues in abeyance. As amplified civil unrest rocks Europe, it is clear that the EU has seen little to no resolution.

Nor has our domestic debt issue been addressed. Neither have the domestic debt issues of countries around the globe. Hoisington writes: “With this global slump at hand, a highly relevant question is whether the U.S. can escape a severe recession in light of the following: the U.S. manufacturing sector that paced domestic economic growth over the past three years has lapsed into recession real income and the personal saving rate have been slumping in the face of an interim upturn in inflation and aggregate over-indebtedness, which is the dominant negative force in the economy has continued to move upward in concert with flagging economic activity.”

Margaret R. McDowell, a chartered financial consultant and accredited investment fiduciary, is the founder of Arbor Wealth Management, LLC, (850-608-6121~www.arborwealth.net), a “Fee-Only” Registered Investment Advisory Firm near Sandestin. Arbor Wealth specializes in portfolio management for clients with $250,000 or more of investable assets.